In the article previous We present a series of unorthodox proposals to fight inflation. In another previous We detailed how the rise in interest rates was not only not going to solve the underlying problem, but was going to aggravate it until it led to a great recession. Behind, both our proposals and our extremely negative assessment of the path followed by the central banks, is our diagnosis of what is behind current inflation, and which we have explained to the point of exhaustion -see the previous article published on these same lines -.
Recently the Nobel laureate in economics, Joseph Stiglitz, has expressed himself in similar terms, although with certain nuances or differences, which from my point of view are relevant. Stiglitz starts from the following hypothesis that we share: the tightening of monetary policy could have the opposite effect to that which is vociferated, that is, it could further increase the escalation of prices. For this he provides different reasons that we can share, although it is necessary in some of them to make certain clarifications about why.
Raw materials as the source of current inflation
First of all, the Nobel laureate points out that the origin of the current rate of inflation is the supply shock, which has triggered the prices of oil and food of all kinds. For this reason, Stiglitz considers that raising interest rates is not going to serve to ensure that there are more basic goods at a lower price, since the problem that has caused this increase will continue to exist. Faced with this situation, he suggests that investments must be made to alleviate some of the bottlenecks that are stifling supply. Although he is right to point to the prices of energy and agricultural raw materials as the initial responsible for the current inflation, he still does not understand why. It is not enough to blame it only on imbalances between supply and demand. The problem came from before the war in Ukraine began.
The fundamental reason for the rise in prices of oil, gas or agricultural products, in the period 2002-2008, and since the end of 2020, is due to their financialization
The fundamental reason for the rise in prices of oil, gas or agricultural products, in the period 2002-2008, and since the end of 2020, is due to their financialization, through the expansion and access to markets derived from raw materials. premiums to speculators and institutional funds. As a consequence, at certain times, the evolution of their prices is not due to economic fundamentals but rather to speculative bubbles and investors’ risk propensity or aversion processes, although they are not symmetrical, having a much greater impact on prices, upwards, during the phases of taking excessive risks, such as the current one. Academic evidence is abundant. In a blog from November 2021! we analyze three of these academic articles. In this sense, I have the feeling, when I present these arguments, supported by the data, that I am preaching in the desert. Remember a maxim, when ineptitude remains over time it is because there are certain class interests that are being protected.
In our first blog published on these lines, in September 2021! it was also detailed why behind the enormous rise in the price of electricity were the spikes in the prices of certain raw materials, especially gas, and, again, we provided previous academic evidence. Did the authorities do anything to understand these dynamics and correct them? No, because in addition to exposing the naked king, market fundamentalism, once again, protected certain class interests.
But if there is someone who has been cleverly taking advantage of these dynamics for a long time, it is Vladimir Putin’s Russia. Only after invading Ukraine and demonstrating the empty analysis of how badly Russia would have a time with the sanctions that we were going to impose on it, the European leaders, against their market fundamentalism, have begun to do some small thing, insufficient, by the way.
The market power of certain companies
Next, the Nobel Prize in Economics points to the market power of big business, whose margins have risen above the cost of goods and energy. For this reason, Stiglitz sees the rise in interest rates as dangerous because these large companies are taking advantage of it to make prices even more expensive and, consequently, drive inflation even more.
As I detailed in a recent blog, in other linesthe increase in market power and business concentration has been widely documented, especially in the case of the United States (Gutierrez and Philippon, 2017; Covarrubias et al., 2019; Grullon et al., 2019; From Loecker et al., 2020), although there are also studies with non-US data (Gutierrez and Philippon, 2018). The economic consequences of the increase in market power are diverse, and range from the decrease in labor and capital shares (Author et al., 2020; Barkai, 2020, From Loecker et al., 2020), in favor of pure benefits (Barkai, 2020), as well as the decrease in the dynamism of the labor market (From Loecker et al., 2020), to a lower business investment in relation to Tobin’s Q (Gutierrez and Philippon, 2017; Crouzet and Eberly, 2019). In addition, companies in sectors with the greatest increase in market concentration have enjoyed higher profit margins, via higher prices, positive abnormal returns on stocks, and more profitable M&A deals, suggesting that market power is becoming an important source of value (Grullon et al., 2019).
As we detailed in our last article in these lines, a broad discussion should be opened about the role of competition regulatory agencies, the composition of their members, and the need to provide them with all the necessary instruments for their work. They must have extensive teams that identify the increase in market power, and have the capacity not only to impose fines in accordance with the damage caused by oligopolistic practices, but, above all, if necessary, cut up and sell businesses and business units. too big to fail and impose prices. But we already warned, they will not. Revolving doors work tirelessly.
Of each and every one of the dynamics described, and the inability to change them, for the defense of certain ideological and class interests, the most affected, the working class and productive capital. The most benefited, as in a neo-feudalism, the rent extractors. Even Francis Fukuyama considers that the neoliberals went too far! To break out laughing if it weren’t for the destruction that all these people have generated.